Euro as a Safe Haven? Citi Says Enjoy It While It Lasts

The euro has taken on a safe-haven role this summer, but the tables could quickly turn.

As investors retreat from emerging markets and other riskier assets on worries about the Federal Reserve providing less stimulus, the euro has been on the receiving end of those flows despite the region’s still-fragile financial conditions.

The common currency has risen to $1.34 from $1.28 in early July. For many investors who are already stocked up on U.S. dollars, the euro’s liquidity and presence in global reserves made it an appealing secondary haven, says Citi G-10 strategist Valentin Marinov. Also, the fears of a euro-zone break-up have abated over the past 12 months.

But when the broad flight-to-safety fades, the euro zone has enough troubles of its own to put the euro back on the defensive. That is why Mr. Marinov warns the euro has limited upside against classic safe havens like the U.S. dollar, Japanese yen and Swiss franc. The euro is off 0.5% today to $1.3327.

The euro will be especially vulnerable if recent fears about the escalating Syrian conflict translate into concerns about the euro zone’s outer nations, he said, where authorities are still trying to dig their way out of debt. An escalation in the conflict could quickly spark a move into safe havens and away from risk, which could drive up borrowing costs in Greece, Italy or Spain, threatening some of the progress made in economic growth recently.

Compounding this with a Fed that’s on the verge of reining in stimulus, the European Central Bank would have all the more reason to loosen up monetary policy, Mr. Marinov said -– putting yet another weight on the euro.